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Financial Institution Letters

Capital Standards
Supervisory Review Process of Capital Adequacy (pillar 2) Related to The Implementation of the Basel II Advanced Capital Framework
July 31, 2008

Summary: The federal bank and thrift regulatory agencies have jointly issued the attached final guidance on the Supervisory Review Process of Capital Adequacy (Pillar 2) under the Basel II Advanced Capital Framework. While this guidance reflects a continuation of the longstanding approach employed by the agencies in the supervision of banks, it provides the clarification necessary to support the implementation of the advanced approaches final rule. The final guidance takes effect on September 2, 2008.

This guidance only applies to banking organizations that use the advanced approaches final rule to calculate their risk-based capital requirements. In general, the guidance:

  • Focuses on three areas: (1) comprehensive supervisory review of capital adequacy, (2) compliance with regulatory capital requirements, and (3) the internal capital adequacy assessment process (ICAAP).
  • Highlights the fundamental objectives of a sound ICAAP: (1) identifying and measuring material risks, (2) setting and assessing internal capital adequacy goals that relate directly to risk, and (3) ensuring the integrity of internal capital adequacy assessments. Capital must meet or exceed regulatory minimum requirements, regardless of ICAAP results.
  • Supports the agencies' existing ability to intervene when necessary to prevent an individual bank's regulatory capital from falling below the level needed to support all material risks to which the bank is exposed.
This guidance neither supersedes nor alters the functioning of the Prompt Corrective Action or leverage capital requirements.

FDIC-Supervised Banks (Commercial and

Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer

Related Topics:
Risk-Based Capital Rules
12 CFR Part 325
Basel II

Supervisory Guidance: Supervisory Review
Process of Capital Adequacy (Pillar 2) Related to
the Implementation of the Basel II Advanced
Capital Framework - PDF
(PDF Help)

Gloria Ikosi, Senior Quantitative Risk Analyst, at or (202) 898-3997

Ryan D. Sheller, Capital Markets Specialist, at or (202) 898-6614

Printable Format:
FIL-71-2008 - PDF (PDF Help)

FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at

To receive FILs electronically, please visit

Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703- 562-2200).

Last Updated 7/31/2008

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